May

2

 Lest we make the same mistake as everyone else, let us look at prices as signals rather than looking at past seasonally adjusted random numbers about announcements, anecdotes, et al. Note the 15% drop in last 2 weeks in gold and most commodities, and the comparable rise in the dollar, and consider whether the markets see less inflation or more inflation ahead, with all the finger pointing, imprecations, and critiques of the putative inflationary bias of recent activities.

Let us also look at the slope of the yield curve and calculate expectations going forward since 1960 or so when the curve was  upward like this, the same way that doomsdayists would look at downward sloping to predict recessions, (as if that was bearish for stocks).

Many forms of dynamic behavior can be modeled by difference equations that reach a fixed point. I hypothesized that after a market hits a fixed point, where the change in the last 10 days is less than 1/3 of the moves in the previous 10 or 20 days, that a new equation might develop with trend following working much better. After testing this with various parameters I concluded that there is not much to it, except that the market doesn't like small moves, i.e. the old idea that rates of return are highest when risk is highest gets one more instantiation.

We had an interesting talk last night by Ed Hudgins of Atlas Society about measuring economic freedom. They have this down to a pretty rarefied state now, and consider most things that people might consider, like property rights, service rates, regulation, corruption, and time and ease of starting business. They conclude that freedom is responsible for everything good from gdp to growth to peace to longevity. However, like The Stages of Growth, all the stages and attributes are retrospective, tied in with past gdp, or expectations for the future thereof, and non-predictive. Their work in trying to measure economic freedom by state might be of investor interest, and things similar to Laffer's efforts in this field might have investment merit. Hutchins himself wants now to measure an index of individuality cross country wise and this brings to mind Sam Otis's remark in Johnny Tremaine, well worth reading for any kid or adult, that the simple reason for giving up life and liberty was " the ability to stand tall ". I believe this the key to economic prosperity also.


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